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UNITED STATES OF AMERICA. 



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COI^GESTED PRICES. 



By M. L. SCUDDER, Jr. 






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CHICAGO: 

JANSEN, McCLURG & COMPANY. 
1883. 






Copyright 
By JANSEN, McCLURG & CO., 

1S83. 



COT^TGESTED PRICES. 



By the title " Congested Prices," I intend to describe 
prices made in certain unhealthy conditions of trade. 
There are times in the existence of our best organized 
commercial systems when the streams of exchanges, 
usually flowing quietly and evenly, become clogged by 
mad rushes. At such times, like the agitated blood in 
the human body under abnormal conditions, the excited 
efforts to effect transfers of property become too strong 
for the customary channels. There is a heaping up, a 
congestion of prices at weak pointy, and, unless speedy 
relief is affqrded, the prostration or destruction of the 
commercial system follows. 

As the knowledge of the cause and cure of disease is 
the proper direction in which to seek the preservation 
of health, so the study of the nature of commercial crises 
is the best method of preserving a sound condition of 
trade. For this reason the investigation of prices in a 
state of congestion leads to the prevention of panics, 
and cultivates that intelligent and sober state of mind 
whicn confines business ventures within prudent limits. 

It maybe noted in the outset that the subject of prices 
is largely within the bounds of mental science. The 
desire for possession, the comparison of desires, the fear 



6 Congested Prices. 



of deprivation, the far-reaching effort to apprehend by 
analogy the desires of others — all these mental phe- 
nomena are manifested in the making of prices, and, 
political economists to the contrary notwithstanding, 
are better worth investigating than the amount of laboi 
expended in production or the extent of the wage-fund. 

Prices are values expressed in money terms ; but there 
is also, I think, a more restricted meaning to tlie term 
in common commercial use which is not noted in the 
dictionaries. Price, I think, implies that a transaction 
has actually been effected ; at least this is true in markets 
where transactions are effected by offerings and bids. A 
merchant may mark the prices on his goods at which he 
hopes to make sales, but a dealer in grain, provisions or 
stocks would hardly make use of the term in the same 
way in regard to his commodities. He might possibly 
speak of it as the "seller's price," but the word price 
alone would mean for him only the money value of a 
commodity as determined by an actual transaction. 
This distinction is important. There are in common 
use the terms "bidding price" and "asking price," but 
neither is regarded as the real price established by an 
actual exchange. 

With this meaning clearly understooa, the term "con- 
jested prices" becomes more significant, and the impor- 
tance of mental conditions is more definitely brought 
out. The opinions of men, their desires, their needs, 
are the elements to be studied. How comes it that for 
long periods, by diligent comparison of their multiform 



The Problem of Panics. 



wants and wishes, having succeeded in accomplishing 
by exchange a very satisfactory state of existence, men 
all at once unite in desiring one thing intently, and 
direct all their efforts, without consideration or judg- 
ment, to attaining it ? This is the problem of panics. 
On September 23, 1873, spring wheat sold in Chicago 
at T.o4)4 per bushel; on September 24 it sold at 89 
cents per bushel. Why was this sudden change in its 
value ? Political economists assure us that value is de- 
termined by cost of production. Yet we are quite sure 
there was no great change in the cost of production of 
wheat within these twenty-four hours. The reason for 
the decline is to be found in the opinions and desires 
of men, and the laws of the opinions and desires of men 
are the chief laws of prices. 

It must be conceded that this subject hardly admits 
of logical treatment. The data are so widely scattered, 
so numerous and so minute, that their classification in 
anything like a connected theory is impossible. One 
in treating this subject conscientiously can only pick up 
an interesting fact here and another there, point out the 
peculiarities of each and cast them away again. If these 
observations seem to teach any valuable lesson, it must 
come from a previous mental agreement between listener 
and speaker, for there is no well placed solid foundation 
amongst these facts upon which a reasoner can build so 
as to command the agreement of all mankind. 

From the ungraspable nature of this subject, it is at 
once the easiest and the most difficult to treat. The 



8 Congested Prices. 



easiest, if one is willing to dogmatize or to prophesy, 
for in this uncertain field a dogmatic assertion or a 
^jrophecy may possibly prove correct ; but the most 
difficult, if one sincerely and by sound method strives 
to reach a positive conclusion. The effort to compass 
and comprehend the infinite number of facts is as yet 
too great for the mind. We cannot get a satisfactory 
hold on the particulars which will warrant us in work- 
ing up surely to the general law. 

In the mechanism of prices, stock and grain ex- 
changes have prominent places. They are organizations 
for the chief purpose of determining and recording 
prices. They are developments from the demands of 
trade, but not the less is the ingenuity remarkable 
which has constructed them and fitted them with well 
established customs and carefully drawn rules, so that 
prices with uniform conditions are made momentarily, 
hourly, daily, for the guidance of all the trading world. 
The advantage of prices made on these exchanges is 
their mathematical certainty. Compared with outside 
trading they are as the demonstrations of Euclid to 
practical surveying. They have a certain quality of 
abstractness, which makes one inclined to call them 
" pure prices." 

These exchanges are undoubtedly the developments 
of the fairs of the middle ages. But they have totally 
changed their characters. The merchants and farmers 
who attended the fairs of Stourbridge or Winchester 
brought their goods and produce, made their exchanges 



Grain and Prodvce Exchanges. 9 

and took away their purchases. But a very small per- 
centage of those who buy or sell on the exchanges of 
the great commercial centers desire to possess the prop- 
erty which they purchase, or are in possession of the 
property which they sell. The fixing of the price is 
the main object of nearly all transactions on these ex- 
changes. For every transaction there must be a pur- 
chaser and a seller, and the price once fixed is made 
the basis of a contract. To the fixing of this price 
each party to the contract brings his widest information 
and his best judgment. One of the two parties must 
be in error in his judgment, as to the supply of, or the 
demand for, the commodity concerning which they con- 
tract. In the course of time it is apparent on which 
side the error of judgment has been made. But it 
rarely happens that either party waits for the other to 
complete his contract. The loser takes his loss when 
he pleases by making another contract for the purchase 
or sale of the same commodity with another party, and 
the winner takes his profit in the same way. It is cus- 
tomary to set off one contract against another. Thus 
there are always a large number of contracts always in 
existence between the members of every exchange, and 
these contracts are almost always for a very much larger 
quantity of commodity traded in than is in existence 
within easy reach of the contracting parties. 

This is roughly the method by which these great 
exchanges are conducted. It is not strictly accurate as 
to the details, for every commodity is subject to pecu- 
liar conditions, and it is a recognized principle of all 



10 Congested Prices. 



exchanges that delivery and pa3-ment, according to the 
terms of the contract, must be rigidly enforced if either 
party desires it. If it were not for this principle the 
prices made on the various exchanges would be without 
value to commerce ; with this principle they become the 
guide of all transactions within the civilized world. 

I wish here to bring out prominently this point, that 
these exchanges and boards of trade are mainly 
occupied in determining prices. It is a sort of 
division of labor. The members of these exchanges 
are not greatly employed in handling or using the 
commodities whose prices they develop. Their busi- 
ness is to determine the prices, and in the economy of 
employments it falls to others to possess and enjoy the 
property. 

It is not to be understood that the members of any 
of the prominent exchanges determine prices solely 
according to their own desires. Every such exchange 
is the center of general attention ; many thousands ot 
interested men are listening, to the click of the tele- 
graph instruments which report its doings, and every 
quotation made is the result of innumerable and wide- 
spread influences, as far beyond the control of a board 
of brokers as are the clouds or the seasons. 

It is hardly worth while to discuss here the morality 
of speculation in the various exchanges. That is a 
subject very much misunderstood, and neither the 
opinions of learned judges nor the statutes of Illinois 
have served to make it plainer ; but, whether it is right 



Economy of Exchanges. 11 



or wrong, it is certainly the height of folly for an 
excitable or inexperienced person, with a small^ margin, 
thus to attempt to take a hand in fixing the price of an 
imi)ortant commodity. 

It is true, however, that this kind of speculation per- 
forms an important office for trade and commerce, — a 
part in the machinery of the world's business which 
cannot be abolished, any more than the railroads can 
be done away with because the locomotive occasionally 
slaughters a careless citizen. 

Very few ])ersons were ruined financially by specu- 
lation in wheat before the days of trading in futures, of 
negotiable warehouse receipts, and of the labor-saving 
machinery of the board of trade. When it was neces- 
sary to pay in full out of one's capital for every 
bushel of grain bought, to provide a place to store it, 
and to go to all the trouble of receiving and keeping 
it, taking a flyer in wheat was no easy matter, and 
persons of inadequate means did not often engage in 
that amusement. Now it is the improvement of the 
machinery — the greater momentum of which it is ca- 
pable — which makes it tempting, and which also makes 
it dangerous. The old-fashioned carpenter's saw rarely 
maimed or injured the boys and careless working-men 
who handled it, but the modern buzz-saw, which now 
does nearly all the work of the older instrument with 
twenty times the speed and economy, cuts off fingers 
and thumbs, and otherwise frequently lacerates heedless 
persons who meddle with it. It is as much more 
dangerous as it is more efficient. Yet no one thinks of 



12 Couvcsieii Prices . 



denouncing the buzz-saw for the lost fingers and 
thumbs, or advocating its destruction. The machinery 
of the Board of Trade is only a big commercial buzz- 
saw. By its means more exchanges are made in a day 
than fifty years ago could be made in a year, yet it will 
sometimes amputate a bank account or lacerate a 
fortune before a careless speculator knows he is hurt. 
But we should not, therefore, condemn the Board of 
Trade. 

It is best to explam that nearly all dealings on the New 
York Stock Exchange are invariably settled by delivery 
and payment, and that sales there for future delivery 
are insignificant in amount. In almost all transactions 
the stocks or securities bought are delivered and paid 
for on the following day. There are there no regular 
settling days, when accounts are adjusted against each 
other, as on the Stock Exchange in London or on the 
Paris Bourse, or in all the grain and cotton exchanges. 
The New York stock brokers are enabled, by means of 
the large amount of banking and other loanable funds 
which their business has attracted to Wall street, to bor- 
row money on the stocks and securities, in which they 
deal, to make their payments in full every day. To 
this fact, I think, is to be attributed a part of the great 
influence which the New York Stock Exchange exer- 
cises in the commercial affairs of the country. It not 
only determines the prices of the chief of those invest- 
ments in which the fix'-d capital of the country is en- 
gaged, but it also exhibits the rate at which the loanable 



The New York Stock Exchange. 13 



funds of the country are to a great extent employed. 
This is no insignificant influence. In the study of 
prices it is very important, and it gives to the quotations 
and operations of the New York Stock Exchange a 
paramount and commanding position in the financial 
affairs of this land. It is the fashion with many editors 
and demagogues to denounce the stock "gambling of 
Wall street," and they doubtless lead many ignorant 
persons to believe that the Stock Exchange is a disrep- 
utable and harmful spot, that the world would be better 
without it. I think that a careful examination of its 
office and influence, its methods and character, will 
prove it to be a highly beneficial and well managed 
institution. 

The reports of the Comptroller of the Currency show 
that forty per cent of the loans of the national banks 
of New York city are demand loans on stock collateral, 
and presumably for Stock Exchange business. It is esti- 
mated, by the same authority, that about forty-six per 
cent of the business of the banks in the clearing-house in 
New York city is for transactions on the Stock Exchange, 
and the clearings of these banks are seventy-six per cent 
of those of the whole country. 

It is easy to see, from these figures, that no other 
single organization exercises an influence equal to that 
of the New York Stock Exchange upon the financial 
affairs of the United states. Indeed no line of trade 
or manufactures, nor any combination of them that is 
likely to be made, can equal its influence. 



14 Congested Prices. 



I have endeavored to make plain these few points 
concerning the use, character and importance of ex- 
changes, because it is now chiefly in the quotations 
made on these exchanges that we must study prices. 
The great agricultural products are now bought and 
sold exclusively on exchange quotations, and no one is 
more benefited by this machinery than the farmer. He 
is able to know, with considerable precision, what his 
product is worth at the time he offers it for sale. The 
value of that knowledge to him can hardly be over- 
estimated. He would otherwise be at the mercy of 
middlemen and speculators. 

The efficiency of these exchanges has developed rap- 
idly in recent years, under the influence of rapid trans- 
portation and the development of the telegraph 
system. There is nothing in civilization more wonder- 
ful than the machinery by which prices are made and 
reported to every part of the world. 

It is by the study of the prices made by the great 
exchanges that we can today best learn the workings of 
the laws of trade. We have, as it were, in a microcosm, 
the opinion of all interested persons as to the money 
value of the chief articles of commerce at each particu- 
lar moment of each business day. 

It is probable, too, that the modern improvements 
have considerably modified the fluctuations in prices. 

In the development through the ages of the influence 
of prices upon human affairs certain cities stand out as 
focal points from which that influence has radiated — 



The First Traders. 15 

Sidon, Tyre and Carthage, Athens and Corinth, Venice 
and Genoa, then Amsterdam, and now London, to be 
followed by New York, perhaps, before the world is a 
hundred years older. There are a thousand cities on 
the globe more prosperous than ancient Sidon ever was, 
but there are none which have been of greater benefit to 
man. The Phoenician galleys, coasting the shores of 
the Mediterranean, were first to show that the wants of 
mankind can be better satisfied by agreement than by 
force. It was a new principle that bargaining may 
create power; that exchanges in which each party gains 
are surer to secure riches than robbery. We know very 
little of the life at Sidon. Very likely the Sidonians 
began business as pirates, but found trading more 
profitable. They are entitled to credit for the dis- 
covery. The fact that they were known as Sidonians 
rather than the subjects of any king speaks well for 
them. It indicates some idea of equality in citizenship, 
a well-defined notion of individual right of property, 
and a government by common consent. Tyre and 
Carthage preserved this characteristic, and indeed 
through the centuries, from that time, cities of commer- 
cial importance have been greater than their rulers. 
Unlimited kingship has invariably destroyed commercial 
prosperity. It is essential to commercial prosperity 
that buyer and seller can meet on terms of commer- 
cial equality; that they can be free to consult their 
own interests only, and to trade or not to trade, as 
seems best to them. It is only under such circumstances 
that fair prices can be made ; and this is the reason why 



16 Congested Prices. 

the great commercial cities of the world have been free 
cities. Whether the desire for a fair bargain preceded 
the desire for civil freedom, no one can tell, but the 
ideas could not have been far apart. And we may 
conclude that the Sidonian merchants, shrouded for us 
in anti-Homeric gloom, carrying out their purple robes, 
and bringing back Eyptian corn and Spanish iron, wine 
from Cyprus and gold from Lydia, were the first 
practical advocates of liberty, as they were the first 
instructors of mankind in the art of acquiring riches by 
voluntary exchange. 

Fair prices can only be made where buyer and seller 
meet on terms of perfect commercial equality. There 
must be equal freedom to trade or not to trade for all 
parties to transactions. We can imagine a highwayman 
taking a thousand dollars from his victim and leaving 
his old hat in exchange, but we would hardly say that 
the price of the hat was a thousand dollars. The 
exchanges of property among savage tribes are often of 
this unfair character; so also is much of the commerce 
under despotic governments. The trading in the 
bazaars of Central Asia at the present time is largely of 
this nature. The leader of a tribe of Turcomans can 
secure much more favorable bargains than he who has 
no armed horsemen at his command, for there is a 
probability that the chief will take by force what he 
wants if the price does not suit him. 

It is not absolutely certain that this element of in- 
timidation is absent from all the transactions of civilized 



Fair Prices. 17 

life. One party to a transaction may so threaten the 
other as to force his acceptance of unsatisfactory terms. 
Such transactions are void in law, but sometimes the 
law cannot be successfully applied. In such cases no 
fair price is made. 

I think also that something of this unfairness is con- 
sidered to exist, when sales or purchases are made under 
compulsion of law or of rules of trade. For example, 
prices made in judicial sales are not regarded as strictly 
fair, nor are those made to enforce defaulted contracts 
under the regulations of boards of trade. The persons 
for whose account such transactions are made may have 
no right to object, but as they have no voluntary part 
in fixing the prices, such prices are not regarded as 
fairly quotable in establishing actual value. 

There is a certain analogy between the weather and 
prices. To be sure the phenomena of the weather are 
natural, while the phenomena of prices are the crea- 
tions of man ; but these phenomena are equally beyond 
man's intelligent control as yet, and perhaps equally 
influence his welfare. 

It is interesting to trace the growth of the fabric of 
prices from the earliest rude exchanges of property to 
the present intricate network of financial relations, 
which pervades civilization like an atmosphere, sustain- 
ing all commercial life, and making possible the enlight- 
ened comfort and happiness of the race. It is hardly 
possible to gain an adequate conception of the change 
in the condition of man through the development of 
2 



18 Con8:ested Prices. 



the system of prices. We m^y compare Abraham in 
the first recorded monetary transaction, buying the 
field of Ephron for four hundred shekels of silver 
"current money of the merchants," with his latest 
descendants, the Rothschilds, bringing the enterprises 
of nations- and of kings to the tribunal of the money 
market. The prices of corn and mutton were matters of 
small concern to the men of Abraham's day. They 
made their own arrangements for food independent of 
their neighbors' wants. They planted their fields and 
tended their flocks and defended them, and, according 
to their success in these pursuits, did they and their 
children have much or little to eat. But now, in Roths- 
child's time, each minute want of Jew and Gentile is 
conceived of on a money scale. It is attainable or 
impossible according to its price. Almost every action 
of a very large part of mankind is controlled by con- 
siderations of price. 

In Abraham's time, and for many hundred years 
afterward, rulers and warriors and priests, governments 
and armies and religions were entirely independent of 
prices, but the meshes gradually tightened round them, 
and now there is no potentate or statesman or pope who 
dares to disregard the market. There is no govern- 
ment foolish enough to move against the current of 
prices, no army can make headway against it, and re- 
ligions are contented to go along with it. 

There is a'rcertain analogy, as I have said, between 
the weather and prices. Somewhat the same qualities, 



The Weather and Prices. 19 

of mind and disposition, which make the weather-wise 
man also make the market-wise man. Much watching 
of the clouds and much experience of storms create 
the instinct which forewarns changes- Much buying 
and selling, long observance of demand and production, 
one or two practical trials of a panic, produce a sense 
of commercial fluctuation. 

The price prophet, like the weather prophet, rarely is 
able to give satisfactory reasons for his opinions, yet he 
is equally confident of his own infallibility. The price 
prophet, like the weather prophet, if successful, has a 
following of blind and wondering disciples. 

The attempt to discover a science of prices is also 
like the attempt to formulate a science of the weather 
in a condition of uncertainty. Each science is sought 
in a series of averages, and each has progressed only so 
far as to offer to the curious observer long tables of 
figures and mathematical charts of differences, from 
which he can draw only vague conclusions. If there is 
to be a science of prices it must be developed, like 
meteorology, through the classification of the records 
of innumerable observations. 

It may be interesting to note in this connection the 
singular superstitions and the absurd theories which, to 
a considerable extent, influence the actions of men 
with reference to prices, and which resemble nothing 
so closely as the old wife superstitions and maxims of 
sailors and farmers concerning weather. Many specula- 
tors are governed in their operations by the conviction 



20 Consresied Prices. 



that prices decline on Friday more often than on any 
other day of the week. I know a man who prefers to 
buy stocks on Tuesday. Many pious people pray for 
higher prices of property which they wish to sell. I 
have heard of a grain speculator, who requested the 
prayers of his minister to enable him to sell at a profit- 
able advance, and who vowed to give a considerable 
sum to a religious charity if Providence favored his 
petition. There is a very general feeling among busi- 
ness men that their individual luck controls prices. 
Some say, " If I buy, prices will be sure to decline ; if I 
sell, they will be sure to advance." This is like the 
common notion of an individual that his carrying an 
umbrella will prevent rain, or his leaving his umbrella 
at home will bring on a shower. 

Hardly any trader is free from some sort of fetichism 
in his dealing. Good or bad luck is believed to be 
associated with various inanimate objects. As storms 
are supposed by sailors to follow a certain ship, so mis- 
fortune is thought to dwell in certain shops. I have 
heard of an operator on the Board of Trade grinding 
to pieces under his feet the lead pencil which has 
recorded losing transactions. 

Another similarity between the market and the 
weather is the tendency which we have to personify 
them. We know that each atmospheric change is pro- 
duced by many causes, and also that each fluctuation of 
prices depends on numerous special reasons. Yet we 
disregard and seemingly forget these facts in thinking 



Cycles. 21 

or speaking of them. We conceive of them as we 
would of an army moving under one leadership. We 
say of the weather, it rains or it is warm, as we say of 
the market, it rises or it is strong. Changes of prices 
are the results of the comparisons of innumerable opin- 
ions, but we see only the aggregate and forget the indi- 
viduals which make it. 

We talk of the irresistible laws of trade, of prices or 
of credit, and yet we believe in man's free agency. 
We surely believe that each transaction in trade is an 
act of voluntary judgment, and yet we treat these trans- 
actions in the aggregate as if they were predestined 
and unavoidable. 

Tracing the analogy between the weather and prices, 
it will be observed that men show a tendency to arrange 
the phenomena of each in cycles, and by noting the 
succession of events in the past to predict the same 
successions in the future. There is something in the 
idea of a cycle which is peculiarly attractive to 
the mind. It is more satisfactory to describe life 
by a graceful, well rounded curve, than by a line 
which is jagged and incomplete. This is shown in 
all fields of inquiry. We search history for curves of 
conduct, and, when we find them, make them con- 
spicuous, and we will generally allow ourselves to patch 
up our favorite curves in their faulty parts at the expense 
of fidelity to facts. It is our disposition to believe in 
heroes, who did no wrong, and in villains who showed no 
good qualities, and to expect that history will repeat itself. 



22 Congested Prices. 



So the weather prophet, anxious to satisfy the human 
craving for a curve, arranges meteorological events in 
cycles, and endeavors to show, because cold and heat, 
rain and snow, frost and drought, have occurred in a cer- 
tain order in the past, that this same order constitutes a 
natural law, and will be followed in the future. I am not 
intimately acquainted with the methods of the eminent 
weather prophets. Indeed they and "their little sys- 
tems have their days and cease to be" so rapidly, that 
one hardly has time to give his unreserved adherence to 
any of them before the failure of some unlucky prophecy 
consigns the prophet and his system to oblivion. But 
I have observed that the cycle theory is accepted by 
all, as if it were a scientific fact, and the only difficulty 
is supposed to be in describing the cycle correctly. 

These remarks apply only to the long-range weather 
prophets, who endeavor to map out the weather of a 
season in advance, and not to the painstaking signal- 
service observers, whose best hope is to be correct, 
twice out of three times, in locating a storm after it has 
begun. 

There is no oureau of government for the observation 
and foretelling of prices. But there are conscious and 
unconscious price prophets throughout the country in 
great numbers, and I think that the belief in the cycle 
theory of prices is almost universal. 

It will not do to treat this theory with disrespect. It 
has been favorably considered by the most eminent 
English writers on this subject. It is the opinion of 
Tooke and Newmarch, of Bagehot and Giffen, that 



Price Cycles. 23 

there are such cycles. But none of these writers 
attempt to give the law by which such cycles may be 
foretold, or do more than point out, with great shrewd- 
ness and accuracy, some of the facts which have attended 
the rising and falling of prices in the past. I think 
that the use of the term cycle by these authorities 
is misleading. It is properly to be applied to the 
recurrence of a certain order of events at a certain 
period. The element of time is essential to the idea of 
a cycle, and if the same events recur even in the same 
order, but at varying times, there is no cycle shown. 

It cannot be denied that the course of prices can be 
approximately represented by curved lines. But the 
fascinating idea, that it can be represented by a regu- 
lar recurring curve, that is by a cyclical cury^, is quite 
another matter. 

I think, however, that this idea quite generally pre- 
vails among men who are in the habit of reasoning upon 
the course of prices, and vague beliefs are common that 
certain years, at set intervals from past financial crises, 
will witness future panics and general liquidations. 

The most consistent attempt, which I have met with, 
to mark these years down definitely in the calendar is 
the work of an Ohio farmer named Benner. He pub- 
lished a small book in 1876 called " Benner's Prophe- 
cies," which passed through several editions, and is still 
read with attention and belief. It is a most curious 
volume, not only on account of the definiteness with 
which some of the prophecies have thus far been ful- 
filled, but also as an illustration of the kind of rea- 



24 Congested Prices. 



soning upon which general prophecies concerning prices 
and weather depend. Farmer Benner was a positive 
man. His prophecies must have been compiled in 
1874 and 1875. -t^^^ most positive declarations are con- 
cerning prices of pig-iron and hogs, and concerning 
the next period of general commercial and financial 
disaster. As to prices of pig-iron from 1875 ^o 1882, 
his prophecies have been in a measure fulfilled. He said 
that pig-iron would sell lowest in 1877, would begin 
advancing in 1878, and that its price would culminate 
in 1881, and that it would then decline again, reaching 
its lowest point once more in 1888. These predictions 
so tar have been justified by events, and judging from 
them alone we are disposed to give farmer Benner great 
glory. But when we examine his forecastings as to the 
prices of hogs we do not find \\\\\\ so fortunate. Ac- 
cording to his cycles in the hog trade, prices were to 
be highest in 1875, would decline in 1876, and reach 
lowest figures in 1877; would rise during 1878 and 
1879 ^"d would culminate in 1880. They would de- 
cline again in 1881 and reach the lowest point in 1883, 
etc. The facts are that hogs sold as high in 1876 as 
in 1875, were lower in 1877, but not so low as in 1878 
and 1879. They sold as a rule higher in 1881 than in 
iSSo, and v/ere higher still in 1S82. Not one of Ben- 
ner' s prophecies concerning the prices of hogs has been 
fulfilled. But it is much more remarkable that anyone 
should correctly foretell the course of prices of pig- 
iron than that anyone should fail to foretell the prices 
of hogs. For this reason I have tried to discover upon 



Benner s Prophecies. 25 

what principle farmer Benner proceeded in reaching his 
conclusions. But, like all other prophets, he can only 
inadequately explain his system; but as far as he explains 
it, it is arithmetical, and consists simply in ascertaining 
the general course of the price of any important com- 
modity in the past and predicting the same fluctuations 
for the same length of time in the future. For example, 
concerning the periods of commercial prosperity in this 
country, he finds that there were panics followed by gen- 
eral liquidations in 1819, 1837, 1857 and 1873. ^^ 
assumes that the interval from 1819 to 1873, fifty-four 
years, constitutes a cyclical period, and that within this 
period are three snialler cycles of eighteen, twenty and 
sixteen years respectively, corresponding to the intervals 
between the several panics. He assumes that a new 
cyclical period of fifty-four years began after 1873, ^'^^ 
that the first small cycle of eighteen years will end in 
1891, for which year, accordingly, he predicts a great 
financial revulsion. This is the only substantial basis 
on which these prophecies rest, and this is sufficiently 
inconclusive ; and yet I think that this reasoning fairly 
represents the popular theory of high and low prices. 
Farmer Benner is plainly not entirely satisfied with the 
logical character of his system, for he continually 
breaks the thread of his argument with sententious ad- 
vice to his fellow men and with proverbs of his own coin- 
ing, and these are only another illustration that the same 
mental qualities characterize the weather prophet and 
the price prophet. And, as if to complete the analogy, 
farmer Benner concludes his treatise by claiming that 



26 Congested Prices. 



"the cause producing the periodicity and length of 
these cycles may be found in our solar system," and 
then goes on to treat vaguely of meteorological cycles 
and planetary equinoxes, with very much the same air 
of mystical wisdom with which Tice and Vennor and 
Wiggins and others discourse of the causes and perio- 
dicity of storms. 

It seems hardly necessary to produce evidence in op- 
position to the cycle theory of prices after this example 
of its last analysis. But there is, I believe, a general 
belief in it. The expression, "a panic is not due yet," 
is often heard, and the larger part of the public rest in 
the conviction that a commercial revulsion, like an 
eclipse of the sun, can be calculated and foretold if only 
the proper persons are awake to their duty. 

After witnessing the panic of September, 1873, from 
the gallery of the Stock Exchange in New York, the 
editor of the Nation comforted his readers with the 
assurance that panics occur in England once in ten 
years, and in this country once in twenty years, and 
concludes with these words: " If this theory be correct, 
our next great panic will be due , about 1877. Let us 
hope, however, that the present slight attack may inspire 
enough prudence and good sense to ward it off." This 
is the astronomer so distracted by his calculation, that 
he doesn't know a total eclipse, even when the umbra 
covers him. 

A careful account of all the great revulsions in prices, 



special Panics. 27 

I think, will show that no one has been a repetition of 
others. Each has had its peculiar characteristics and 
causes. 

But this opens the field for history into which I can- 
not enter. The stories of the great panics have been 
fully and accurately told by many able writers. A read- 
ing of then\ will show that great panics are as dissimilar 
as great battles. We can acquire from them no more 
reason for concluding that we will experience a financial 
panic once in ten or twenty years than from the facts of 
military history that we shall pass through a great war 
once in so often. 

In this country the panic of 1837 was precipitated by 
wild speculation in land, and that of 1857 by unsound 
banking. In England the panic of 1846 was brought 
about by unwarranted expenditure in railroad building ; 
that of 1866 by too great confidence in limited liability 
companies. 

The panic of 1873 was caused by over speculation in 
all commercial countries. Robert Giffen, the present 
President of the London Statistical Society, looking at 
it from an English standpoint, called it a "foreign- 
loans panic." From an American standpoint, it was a 
general-loan panic. The American people generally 
had borrowed money and bought property. Real estate, 
not only in the west, but in the cities and towns of the 
east, was largely mortgaged. Railroads were mortgages 
to a greater extent probably, in proportion to their cost, 
than any other kind of property. Manufacturing com- 
panies carried heavy bonded debts and heavy lines of 



28 Congested Prices. 



discount. Merchants had all the paper out which the 
banks and their friends would take. 

Former panics in this country had been greatly influ- 
enced by distrust of the currency. There was nothing 
of this in 1873. Men hoarded greenbacks and national 
bank notes with absolute confidence in their value. 

Former panics have been created to some extent by 
special disasters, such as deficient harvests or wars or 
political commotions. There were none of these in 
1873. Crops were abundant, and the world was at 
peace. 

It was simply a realization on the part of a great 
number of men that they had borrowed more than they 
could readily pay, or that they had lent more than they 
could readily collect. The business of the country was 
done on a too narrow margin of capital. The suspen- 
sion of the house of Jay Cooke & Co., the closing of 
the New York Stock Exchange, the suspensions which 
followed, the devices of the banks to resist the fiist rush 
of excited depositors — these were but the striking inci- 
dents which were not especially characteristic of the 
course of events. But the gradual liquidations which 
followed, with gradually declining prices through several 
years, are peculiar and noteworthy. This decline was 
resisted by strenuous arguments, and by mutual assur- 
ances of confidence. But those who sold their proper- 
ties at once and settled their accounts, were the most 
fortunate. These were few. Nearly all masked their 
eagerness to sell behind declarations that the decline in 
prices was but a temporary reaction, that prices would 



The Panic of 1873. 29 

soon improve, and that properties were cheap. And 
thus the long and weary struggle went on, between 
growing interest accounts and maturing loans on one 
side, and slirinking assets and decreasing incomes on 
the other, until it ended for many in bankruptcy, dis- 
grace and poverty. Lenders suffered as greatly as bor- 
rowers. Indeed, it was impossible to classify the people 
in this way, for the majority of business meri were both 
borrowers and lenders. Lenders were compelled to take 
collateral and securities which they did not want and 
could not use, and which they in their turn sacrificed at 
the first opportunity. 

There was nothing especially calculated to give warn- 
ing of approaching disaster in the course of events just 
before the panic of 1873. The daily record of financial 
matters during the summer of 1873 ^^^-^is like the story 
of greatest confidence and security. In August the 
stock market was dull, with good prices for leading 
stocks. Money was easy, and the banks held reserves 
largely in excess of the legal requirement. Early in 
September Mr. Jay Gould was credited with an attempt 
to run a corner in gold. This failed, and he became a 
bear on stocks, especially on Western Union Telegraph 
stock. The reported earnings of the railroads were 
greatly in excess of those of the previous year, and yet 
the newspapers accused the directors of the Milwaukee 
& St. Paul railroad of depressing their stock in order 
to buy it. (A strangely familiar item.) 

Money began to rise in price early in September, and 



30 Congested Prices. 



the reserve decreased. The week before the panic the 
reserve fell below legal requirement, and money on call 
on stock collateral commanded a premium above the 
legal rate. Sixty-day commercial paper was discounted 
at from nine to twelve per cent per annum. September 
8, the New York Warehouse & Security Co. was re- 
ported in trouble. This company had made consider- 
able advances on bonds of n*ew railroads. September 
12, the firm of Kenyon, Cox & Co., in which Daniel 
Drew was a general partner, failed to meet its engage- 
ments, owing to endorsements of railroad paper, par- 
ticularly the paper of the Canada Southern. September 
15, Jay Cooke &: Co. closed their doors, and the absolute 
tranquillity and confidence of less than thirty days 
previous was succeeded by the wildest agitation. 

An account of the scene in Wall street on the days 
following the suspension of Jay Cooke & Co. and be- 
fore the Stock Exchange closed its doors, describes 
"the brute terror with which great crowds of men 
rushed to and fro, trying to get rid of their property, 
almost begging people to take it from them at any 
price," and says, "No dog was ever so much alarmed 
by the clatter of the saucepan (at his heels) as hundreds 
seemed to be by the possession of really valuable and 
dividend-paying securities, and no horse was ever more 
reckless in extricating himself from the debris of a 
broken carriage than these swarms of acute and shrewd 
traders in divesting themselves of their possessions. 
Hundreds must really, to judge by their conduct, have 
been so confused by terror and anxiety as to be unable 



ll'hat Produced the Fafiic ? 31 

to decide whether they desired to have or not have, to 
be poor or rich." 

The interesting question to the calm observer, at this 
distance of time, is as to the cause which could produce 
such wild terror in men not different m any particular 
respect from ourselves. Was it the sudden realization 
that they had borrowed more than they could readily 
pay, which drove them crazy ? How was this change 
in feeling brought about? During the previous sum- 
mer there were numerous prophecies of impending 
financial trouble. But this goes for nothing. There 
are always plenty of such prophecies. No storm ever 
sweeps the sky but some grumbler has foretold it, and 
there is no day so bright, but it is marked for a cataclysm 
in some calendar. There are always innumerable 
signs of the times, which one notices afterward, and 
there would be a panic every month in every year, if the 
foretelling disaster could produce it. But no one of 
the forebodings, which I have ;net with, has attempted 
to show the special condition in which men's minds are 
suddenly converted from a state of perfect confidence 
to a state of absolute fear. It is not credible that 
men generally were so ignorant of their financial con- 
ditions in August, that an examination of their affairs 
in September could throw them into despair. Yet it is 
necessary to imagine such a situation, in order to 
account for the effect produced. If we can suppose 
that the clerks of the majority of the bankers of Wall 
street had robbed their employers of half their capital 



32 Conzesfed Prices. 



and absconded together, or if there had been a com- 
mon falsification of accounts, we might find a sufficient 
reason for a general collapse of credit. But no such 
treason or deception was charged or believed. 

Could the panic have been averted if Jay Cooke &: Co. 
had secured a loan sufficient to have met their current 
obligations? Could the business of the country have 
been brought by wise management to a sound basis 
without a general liquidation ? Conjecture only can 
answer. 

It is firmly implanted in our minds, because we have 
passed through the experience, that some such process of 
fright and sacrifice, of distrust and realization, is neces- 
sary occasionally to produce a sound state of credit. 
But the proposition will hardly bear examination. Blind 
fear and unreasoning distrust should characterize only 
the ignorant and inexperienced. Well trained men of 
affairs should never give way to such passions. It is 
only by supposing that the business world is a mob of 
ill-taught and ill-informed novices, that we can imagine 
them liable to such affections. It is known that raw 
levies and undrilled crowds can be panic-stricken by 
vague danger, but disciplined and skillful soldiers can- 
not be stampeded by uncertainties or sudden alarms. 
And, by this analogy, it may be asserted that when the 
business of the country is controlled by men of sound 
courage and good training, financial jjanics will be 
impossible. It is not Utopian to look for a time when 
financial catastrophe will be averted by organization — 
when threatened congestion of prices will be prevented 



Panics do not Repeat Themselves. 33 

by scientific treatment. There are many philanthropists 
and statesmen who expect the time when wars will be 
avoided by international arbitration — 

" When the common sense of most shall hold a fretful realm in awe. 
And the kindly earth shall slumber lapt in universal law ; " 

then the same common sense, which restrains angry 
passions, will check sudden fear; and when masses of 
men possess the self-control to submit their disputes to 
the decision of disinterested tribunals, they can no 
longer be stampeded in blind terror by any unexpected 
event, whether financial or physical. 

I have said that no panic is a repetition of any other, 
and I think that an examination of the history of financial 
affairs will show that the special causes which have led 
up to each panic have been removed in the time follow- 
ing. Each panic has had its lesson, which has been 
practically learned. 

The English people have not speculated wildly in rail- 
way shares since the time of Hudson, nor committed 
their funds blindly to limited liability companies since 
the failure of Overend, Gurney & Co., nor invested indis- 
criminately in the stocks of foreign states since the days 
of the Foreign .Loans Committee. 

In this country there has been no speculation in land 
as rabid as that immediately preceding 1837. We have 
thoroughly reformed our banking system, so that the 
" wild-cat scare of 1857" can never visit us again. I 
think also that we have learned wisdom from 1873, ^"<i 
afe exercising great caution in the matter of loans. Mer- 
3 



34 Cons'ested Prices. 



chants and manufacturers generally are careful about 
increasing their liabilities beyond a fair proportion to 
their capital. And bankers are cautious in giving accom- 
modations. There is but little disposition to borrow 
money on mortgage, or to buy real estate on partial pay- 
ments. And although the amount of railroad bonds has 
greatly increased, and is increasing daily, yet, except on 
roads completed and in successful operation, these are 
scarcely salable at any price, and are not accepted as col- 
lateral. Before 1873 ^'^ the manufacturers of and deal- 
ers in railroad iron and equipment were burdened with 
bonds on partially constructed roads, on which they 
had made advances of goods or material. Now the 
rolling-mill companies and the car builders of the 
country have little or none of this species of property 
in their hands. 

Business men have been taught by trial. They will 
not put themselves in positions which they have found 
may be so unpleasant. If panic comes again, it must 
find some new avenue of approach. It will not come 
at any appointed time, like an eclipse. We cannot make 
engagements for its appearance. Neither will it come 
in familiar form, so that we may know it when it ap- 
proaches; nor by its old paths, so that we may guard 
against and resist it. 

The only safe prophecies which we can make con- 
cerning it are, that if it comes it will come when we are 
not looking for it, and that it will be something differ- 
ent from what we have anticipated. 



Almost a Panic. 35 



The assassination of President Garfield very nearly 
caused a panic, and did cause a very considerable 
liquidation of accounts. Startling and horrible as was 
the intelligence that the P'-esident of the United States 
had been suddenly shot and probably mortally wounded, 
there was nothing in the fact which should have dis- 
turbed the business of the country. But the shock to 
the sensibilities of men was so great that many ceased 
to reason, and acted from blind terror. If the tragedy 
had occurred on a day when all the exchanges were 
open and business was in full course, in all probability 
a severe panic would have occurred. But it was on 
Saturday, the 2d of July. The Chicago Board of Trade 
and other exchanges were not in session, and many 
business men were away from their offices for the 
coming holiday. The Stock Exchange in New York, 
however, was open, and simultaneously, as it seemed, 
with the flashing of the news over the land came the 
orders to sell stocks. Prices fell rapidly, and transac- 
tions became very large. It was nearly a panic, but a 
few men, who had great personal interests at stake, met 
together and gave orders to buy all of certain principal 
stocks which were offered at certain prices. By this 
means the panic was averted. The next day was 
Sunday, and on Monday, the 4th, all business was sus- 
pended in this country. But the Stock Exchange in 
London was to be feared, and the same men who had 
bought all stocks offered in New York on Saturday 
bought, also, in London on Monday, so that American 
securities were quoted steady in European markets, and 



36 Conzested Prices. 



at the opening of the Stock Exchange in New York, on 
Tuesday morning, there was no longer a pressure to sell, 
and stocks advanced. 

But although an actual panic was prevented, some of 
the consequences of panic followed. The nerves of 
the American business public seem to have been badly 
shaken. General despondency took the place of san- 
guine expectation. As the life of the President slowly 
ebbed away, the vigor of great enterprises and the anima- 
tion of trade seemed to depart. A gradual decline in 
prices set in, which, perhaps, has not yet reached its 
turning point ; and many a man can now see that the 
bullet of Guiteau shattered his chance of fortune, and 
not a few date from that crazy deed their financial ruin. 

As most of the men now in business remember vivid- 
ly the panic of 1873, ^^^ believe that it was made possi- 
ble by an unwise expansion of credit, — that is, that 
nearly everyone had borrowed more money than the 
capital employed in his business would warrant, — so 
most men expect to avert the consequences of the next 
panic from themselves by caution in the matter of loans. 

It may be admitted that a panic can hardly cause con- 
tinuous and widespread disaster where there is no great 
indebtedness; yet I think that a panic may occur and 
a distressing decline in prices follow, even when there is 
no unwise extension of credits. Debts were not greater 
than they should be at the time of the assassination of 
Garfield, yet we barely escaped a panic, and experienced 
a very unpleasant fall in prices. 



Hopefulness. 37 

It is well, therefore, to take notice that there are other 
causes of panic than unwise borrowing and lending, and 
to be on our guard against other dangers which may 
menace our commercial prosperity. 

There is danger of panic in any cause which may de- 
press prices. Hopefulness naturally is a continuous 
force, while despondency acts spasmodically. Hopeful- 
ness is pleasant, and we encourage it to remain. Des- 
pondency is unpleasant, and we admit it only when it 
is forced upon us. The tendency to higher prices 
is agreeable, but the tendency to lower prices is dis- 
agreeable, and we yield to it reluctantly. If we could 
divest ourselves of feeling, and look at prices only as 
reasoning beings, we should accept a fall in prices when 
the state of trade favored it, and there would be no 
panics. Gradually by the development of knowledge 
and training we may approach this condition. We 
or our descendants may have the ability to balance 
cause and effect dispassionately, and the wisdom and 
self-sacrifice to accept lower prices contentedly. It is 
true that the professional speculator cultivates this qual- 
ity, and the short seller (of whom I have more to say 
later) may be the germ from which the future masters 
of commerce will develop. 

There are now dimly descernible on our horizon sev- 
eral scarecrows which, some time in the twilight when 
we are off guard, may be metamorphosed into active 
spooks and throw us into spasms of fright. 

There is demagogism, — the efforts of many editors 



38 Congested Prices. 



and politicians to create and arouse prejudice in the 
people against the machinery of commerce. It is a 
common thing to hear the men most prominent in or 
ganizing industries and developing the wealth and 
resources of the country, denounced as monopolists and 
robbers, or to see in the columns of leading newspapers 
those admirable devices for public benefit, the railroad 
companies and the banks, styled swindling schemes or 
frauds upon the rights of men. We have become so 
used to this rant that it fails to make us indignant. 
We know the editors and the politicians do not mean 
what they say, and we fall into the belief that no one is 
deluded by them. But none the less is this a real dan- 
ger. This constant demagogic raving serves to keep 
these absurd prejudices alive, and events may occur 
which will cause them to flame up with disastrous vio- 
lence. 

The danger with which demagogism menaces us most 
visibly just now is the silver dollar. The government 
is adding two millions per month to its hoard of these 
coins, which are useless in trade with the world. If we 
have a season of depressed prices, and of complaints from 
the people, will not this depreciated currency be forced 
into circulation? If this comes suddenly it will create 
a panic of capital anxious to escape out of the country 
and take itself in the form of gold over the sea. If it 
comes gradually it will have the same effect, only the 
country will grow poorer more slowly. 

The danger of demagogism against the banks and in 
reference to legal tender paper money has probably 



Various Causes of Panic. 39 

passed for the present, but no one can tell when it will 
break out again. 

Against railroad companies demagogues find a con- 
stant exercise of their voices. But, by a sort of inertia, 
the railroads seem to be able to ward off the damage 
which all sorts of absurd laws threaten to inflict upon 
them, until a general notion prevails that the railroads 
can defy demagogues — and also the rest of the people. 
Indeed the bills and enactments of legislatures, on this 
subject, are generally regarded as nothing more than 
invitations from the demagogues to the railroad men 
to come and corrupt them. 

There is little danger of a financial panic in this 
country from the immediate actions of socialists, com- 
munists, nihilists, or the liberators of Ireland by dyna- 
mite. There is no mark in this country sufficiently 
prominent to draw their sensation-seeking fire. The 
peculiar glory which they covet can hardly be gained 
by ruining our public buildings or slaughtering a score 
of congressmen. But the destruction which they may 
cause in Europe may react with disastrous effect upon 
our trade and prosperity. 

Whatever combination of circumstances tends to a 
serious depression of prices may produce a panic, if not 
well understood and wisely accepted. But the danger 
of panic is much increased, if prices are artificially sus- 
tained when they should naturally fall. 

I think there are three ways in which there is danger 



40 Congested Prices. 



that prices will be artificially sustained when they would 
naturally decline, and by such artificial support the very 
matter and form of panic may be provided : 

First, the price of labor. It is sought by combina- 
tions among the employed in every branch of trade and 
manufactures to raise the compensation of labor to the 
liighest possible point. These combinations, — trades 
unions, brotherhoods or knights of labor — are very well 
if managed with caution and sagacity. But the diffi- 
culty just now is that workmen are inexperienced in 
managing these combinations. They have a greatly 
exaggerated idea of their importance and power. They 
are determined to exact the last cent which employers 
can be induced to pay, and to refuse to work and to 
prevent others working, if they can't get it. As a con- 
sequence, the largest part of the manufacturing of the 
country is now carried on on a very light margin of 
profit, if not at a positive loss. A slight fall in prices 
would make manufacturing generally a losing under- 
taking, unless a corresponding reduction in wages could 
be effected. This, if we may judge from the present 
temper of the combinations, would not be agreed to. 
What is true of manufacturing is true of building and 
mining and railroad operating, and of most of the forms 
of production (except farming) in which labor is em- 
ployed. 

This condition of affairs is aggravated by a large im- 
migration of laborers from Europe. The natural effect 
of this immigration would be to stimulate manufac- 
turing by providing cheaper labor. Under the control 



Prices of Railroad Securities. 41 

of the combinations, however, the rate of wages is sus- 
tained, and manufacturing and other forms of produc- 
tion are barely maintaining average activity. The result 
of this state of affairs, especially if there is a fall in 
prices of manufactured goods, may be a panic among 
manufacturers — a general rush to withdraw capital from 
such unprofitable investments. 

Second, the prices of railroad stocks and bonds may 
be artificially sustained, above their natural level, so per- 
sistently, that a sudden and ruinous break may be caused 
by the sheer force of financial gravity. On the first of 
January, 1879, there were in operation in the United 
States about 81,000 miles of railroads. It is estimated 
that there are now in operation about 115,000 miles. 
There has been an addition of 42 per cent to the rail- 
road mileage in four years. This is an enormous in- 
crease, and greater than the increase of the industries 
of the country in any other direction. The cost' of 
these railroads has been taken from the surplus profits 
of the country, or from its floating capital. Have the 
people of this country earned this money, over and 
above their cost of living, as fast as the railroad builders 
have spent it? It seems impossible that they could 
have done so, and, if not, it has been taken from the 
floating capital. That is, we probably have put more 
into fixtures than we can afford to. We see sometimes 
a too sanguine merchant building a store so large that 
with his remaining capital he cannot fill it with goods, 
or a manufacturer providing himself such an extensive 



42 Congested Prices. 



plant that he cannot operate it to advantage. It may- 
be that, as a people, we are in the same condition. If 
this is our case, the prices of railroad stocks and bonds 
should be such as, at least, not to encourage further 
expenditure in that direction. 

But the conditions under which the prices of the rail- 
road stocks and bonds are made are peculiar. The 
facility with which investments can be made in these 
securities and the ease with which they can be realized 
upon are so great, that they draw a large proportion of 
the free capital of the country. The machinery of the 
Stock Exchange is well devised and smoothly operated. 
Any one who wishes to make an investment has a long 
list of stocks and bonds to choose from. He has but to 
say a word and the particular security he wants is bought. 
He pays for it and it is delivered to him, or if he wishes 
to pay only a part of the price, his broker, without any 
trouble to his customer, borrows the balance of the pur- 
chase price and the customer is at liberty to complete 
the transaction at any time. The purchaser has no an- 
noyance with details, as he would in buying a house or a 
farm, a factory or a mine, or in lending on mortgage or 
on commercial paper. And likewise, if one wishes to 
sell any of the securities quoted on the New York Stock 
Exchange, he only gives the order and his property is 
sold. It is delivered and paid for without a word. 
There is no other kind of property which can be sold 
and transferred with half this readiness and regularity. 
The quickness and precision with which this machinery 
of exchange is worked attracts capital and encourages 



- Bears. 43 

speculation. As a consequence, a considerable part of 
the capital in railroads is invested with the expecta- 
tion of deriving profit, not from the earnings of the 
property, but from the rise in price of the stock. The 
result is a large and powerful influence, constantly at 
work, to maintain a rising scale in prices. This influ- 
ence exerts itself in many ways with extraordinary 
shrewdness and perseverance, — in the publication of 
favorable rumors, in exaggerating earnings and conceal- 
ing expenses, m the formation of pools to sustain prices, 
and in a thousand devices which cannot be detected or 
described. 

The danger is that these methods may be pursued too 
long and too successfully, and that some day they may 
be discovered to be deceptions, and a rush to sell all 
railroad investments may follow. 

Fortunately there are bears. In the ingenious machi- 
nery of the Stock Exchange it is arranged that stocks and 
bonds may be borrowed readily, and so any one who 
thinks any of this property is selling at a higher price 
than it is worth, may borrow it and sell it. This is 
" selling short," and the seller is generally able to bor- 
row the stock, which he has sold, for an indefinite period. 
Oi course he must finally buy the stock and make a re- 
turn of that which he borrowed. But so quickly and 
easily is this process performed by the brokers, that it is 
usually no more trouble to sell stocks before buying to 
make a profit on the decline, than it is to buy before 
selling to make profit on the rise. Thus bears are pro- 
vided, speculators who operate for a fall. 



44 Congested Prices. 



And very useful members of the commercial commu 
nity are these bears, although they are visited with 
much abuse and little sympathy. They are few in 
number compared with the bulls — the sanguine specu- 
lators for a rise — and they have comparatively little 
capital with which to back their ventures. They are 
usually hard-headed men who care nothing for popu- 
larity, but have a great regard for facts. They are in- 
credulous as to rumors, suspicious as to official state- 
ments, and accept affidavits with caution. They are 
doomed to pass long periods in moodiness and neglect, 
while the sanguine crowd is exulting in rising prices, 
and when prices fall and they grimly take their gains, 
they are looked upon by the majority as the prophets 
and contrivers of all their woes. 

The bears do much to prevent prices rising much 
above their natural level in the stock market, but they 
are at best only spasmodic operators, and have not the 
same permanent interest in the prices of railroad prop- 
erties that the bulls have. Having capital and num- 
bers on their side, it is highly probable that the bulls will 
succeed in forcing prices up to a dangerously high 
point, from which they may come tumbHng down, when 
we suddenly discover that we have put too much of our 
floating capital into railroad building. 

Third, corners are the means of creating artificially 
high prices, and preparing the market for panic and 
general collapse. 

Causing high prices of breadstuffs by manipulation 



Corners. 45 

has always been reckoned shameful, and has been an 
offense against law in all countries, civilized and un- 
civilized. Forestall ing, buying a commodity on its 
way to market with a view to enhance its price, en- 
grossing, buying all or nearly all of a commodity in 
the market, regrating, buying corn or provision: with, 
the view of selling at a higher price in the same or a 
neighboring market, — all mild forms of cornering were 
offenses at common law, and were punished by the pil- 
lory, by loss of property or by imprisonment. The 
Roman law also punished dealers for these practices, and 
for other misdemeanors calculated to raise the price of 
provisions. This is also a crime in Oriental lands. No 
longer ago than April, 1881, the Prince-Governor of 
Karman, in Persia, cut off the ears and plucked out 
the beard of a baker, who succeeded in cornering the 
grain market of Karman. 

This is also nominally forbidden by the statutes of 
Illinois ; but the laws of Illinois are less carefully 
enforced than those of Persia. There is a successful 
corner in some kind of grain or provisions nearly every 
month in Illinois, and no one is ever punished there- 
for, except the rash men who expect that the law will 
be enforced. 

The use of the word "corner" in this sense is an 
American invention, and its sense seems to be misap- 
prehended in England. Bagehot, while saying that it 
is an American "cant word," defined it to mean a 
"gang of persons who obtain possession of the whole 
supply of any article, and will only sell at an excessive 



46 Congested Prices. 



price." The chief dictionary in use in England says a 
" corner" is " a clique or party formed to take posses- 
sion, &c." This is not a correct definition. The 
gang, clique or party engaged in cornering the market 
for any commodity are not spoken of as the corner. 
Mr. C. F. Adams, Jr., is nearer right in defining it as 
" the result produced by a combination of persons who, 
while secretly holding the whole or the greater part of 
any stock or species of property, induce another com- 
bination to agree to deliver them a large further 
quantity at some future time." But it is not necessary 
that there should be a combination of persons, or that 
the managers of the corner should first secretly hold 
the whole or a large part of any commodity, or that 
the agreements to deliver a further quantity should be 
induced by them. A corner, according to our under- 
standing, is that condition of the market for any com- 
modity, when one person or party holds all of the 
commodity in that market and also holds contracts for 
the delivery of a considerable quantity more. The 
object of creating a corner is to compel those who have 
contracted to deliver the commodity to pay an exor- 
bitant price for it. 

The public has two standpoints from which it regards 
corners, especially corners in grain or provisions, and 
it depends on its temper at the time which view it 
takes. 

In times of adversity, when trade is dull and profits 
are small and wages are low, and the closest economy 
in means of living is necessary, then a corner in pro- 



The Profit of Corners. 47 

visions is felt as a tax on each man's bread. Then it is 
regarded as forestalling was regarded in the days of the 
Henrys and the Edwards, as an offense against public 
trade which must be suppressed and punished. Then 
the public denounces corners, and the legislature makes 
laws against them. But when matters are more pros- 
perous, when wages are fair and everyone has enough to 
eat, and there is little anxiety as to the future, then the 
farmers rejoice in the high prices of wheat or corn or 
pork or lard, although they have sold what they have 
had, they have more coming on, and it is not easy to 
make the prices seem exorbitant to them. Then the 
spirit of speculation is abroad in the land, and there is 
a sympathy with and a gratification at higher prices; 
then there is scorn for the men who "sell what they 
haven't got," and a satisfaction in making them pay 
roundly for their temerity. Looking from this stand- 
point the public approves corners, and the law, which 
the legislature has placed on the statute-book against 
them, is a dead letter. 

It is, however, as they create artificial prices that I 
wish especially to call attention to corners. It is the 
general testimony of experts in cornering markets, that 
with few exceptions corners are unprofitable to those 
engaged in them. It is almost impossible to sell the 
commodity after the corner is completed for enough to 
cover first cost, and frequently the loss in marketing the 
stock which has accumulated is greater than the amount 
which has been squeezed from the shorts. A corner in 



48 Congested Prices. 



any prominent article of commerce, such as grain or 
cotton, deranges the course of trade and makes sub- 
sequent prices irregular and uncertain. The effect of 
the great corner in wheat in 1879 '^^'^ 1880 was the sus- 
pension of exports of this product to Europe, the 
reduction of ocean rates to nominal figures, the driving 
of many vessels from New York to foreign ports and 
the opening of the wheat export trade of Calcutta. 
This was a permanent damage to the productive indus- 
tries of this country. It happened that this corner was 
thoroughly carried to its legitimate conclusion. It 
was not a mere conspiracy to squeeze a few shorts. The 
syndicate, who bought nearly all the wheat in the coun- 
try, seemed to have believed that Europe must have it at 
any price, and they looked for a large profit in selling it 
for actual consumption. But they were greatly in 
error. They found that the world could get on for 
awhile without their wheat, and they were at last willing 
to close out their speculation at a considerable loss. 

The influence which this great corner exercised on 
the wheat trade of the world, the lesser corners, which 
are at times almost of monthly occurrence on the Chi- 
cago Board of Trade, exercise also, only in a less marked 
manner. They demoralized trade and create fictitious 
prices. 

Much has been said in the newspapers about the cor- 
ner in spring wheat in July 1882. This corner was 
successful, as corners go. The shorts were forced to 
settle their contracts, after a prolonged and stubborn 
contest, at prices greatly beyond what the property 



The Losers by Corners. 49 



could be sold for, for actual consumption. And yet the 
accounts of the corner, if they are settled, cannot show 
any very satisfactory result. There were about 1 6,000,- 
000 bushels of spring wheat bought by the clique at 
prices not varying far from 1.25. Of this, 6,000,000 
bushels were delivered, being all the No. 2 spring wheat 
in the Chicago elevators, and on 10,000,000 bushels the 
difference between 1.25 and 1.35 (the settling price fixed 
by the committee) was paid, amounting to about §1,000,- 
000. But the clique were obliged to sell the 6,000,000 
bushels of wheat, which they had on hand, to consum- 
ers. The greater part was exported. It could not 
have been sold at prices equal to one dollar per bushel 
in Chicago, and much of it undoubtedly went for less. 
However, if we reckon the 6,000,000 bushels sold at 
one dollar per bushel, there is a loss to the clique of 
$1,500,000, which is partly paid by the §1,000,000 
squeezed from the shorts, leaving as net cost to the 
clique, for the pleasure and excitement of cornering the 
market, §500,000. 

If the clique and the shorts together lost §1,500,000, 
who gained it ? Undoubtedly a large part of this sum 
went to the producers of the wheat. The farmers or 
their agents realized twenty-five cents per bushel more 
for this 6,000,000 bushels, than they would if it had 
been sold directly to the consumer, and had not been 
cornered on the way. 

And yet, in the long run, perhaps the farmers are 
greatest losers from corners. For the artificial prices 
created by corners give them extravagant ideas of the 



4 



50 Congested Priees 

value of their produce, lead them to look not to legiti- 
mate demand but to manipulation of the market for 
their profit, and tend to form for their calculations 
unreal and unsafe bases. 



It is not, perhaps, possible for a financial panic to be 
directly caused by a corner, or a series of corners, in 
grain or provisions, as matters are at present conducted 
in our exchanges. But it is hardly possible to overlook 
the danger in these periodically inflated prices. As long 
as the speculators alone suffer, the public may be careless, 
and the farmers may chuckle and approve. But some 
day one of these corners will squeeze the consumers 
perceptibly. Already it is asserted that the high price 
at which American corn is held is stimulating production 
in new fields. Some day we may find that, with a large 
supply of breadstuff in the country, there is much suffer- 
ing among the poorer people, and inability in Europe to 
pay our prices. And then we may find that European 
markets are filled with other grain, and that ours is not 
wanted. If such a condition of our trade were rapidly 
brought about, it would undoubtedly cause a most 
destructive panic and fall in prices. 

Bagehot has expressed the opinion that a rise in prices 
is started by some large profit in some trade or line of 
production. The people engaged in this line find that 
they are accumulating a surplus, and have something 
more to spend. This stimulates production in other 



Natu7-al Decline in Pi-ices. 51 

trades, and gradually the whole commercial world is 
filled with confidence and a belief in higher prices. 

It seems to me that the downward movement is pro- 
duced in a similar way by a great loss in any trade or 
line of production. This loss should cause a curtail- 
ment of expenditure, less activity in trade, a lessening 
of confidence, and a belief in lower prices. 

If this view is correct, it is the part of intelligence to 
see the fact when it exists, and the part of wisdom to 
accept the legitimate consequences cheerfully. We 
cannot always be blessed with rising pnces. Sometimes 
the tendency must be in the opposite direction. De- 
clining prices are not necessarily caused by folly, 
carelessness or wickedness. They cannot be prevented 
by wisdom, diligence and righteousness. Declining 
prices are not disgraceful, and may not even indicate a 
general cessation of prosperity. Periods of declining 
prices are marked by careful accounting, by closer 
criticism of business methods, by diminished waste, by 
the better adapting of means to ends. In such periods 
invention is stimulated and good habits are strength- 
ened. 

But declining prices do not imply congested prices. 
Seasons of declining prices must come, but panics may 
be avoided. We are just now probably in a period of 
declining prices. There has been a great fall in the 
price of iron, and a great curtailment of profit in that 
trade. It is inevitable, if the theory here described is 
correct, that this loss should spread to other trades and 
lines of production and result in a lessened demand for 



52 Cofigested Prices. 



all commodities and a general fall in prices. If the 
commercial world accepts this inevitable decline calmly 
and intelligently, and judiciously provides for it, its 
consequences may be strengthened credit, better organ- 
ized machinery of trade, a broader and safer basis for 
future production. But if it is resisted by the various 
means I have indicated, it is possible that panic and all 
the disastrous consequences may be imminent. If 
demagogues endeavor to sustain prices by meddling 
with the currency or attacking the railroads ; if the 
combinations of laborers maintain artificial prices for 
labor, or the combinations of capitalists artificial prices 
for stocks and securities, or the combinations of specu- 
lators artificial prices for grain, provisions and other 
commodities, the whole falsehood will some day be 
suddenly and generally recognized. Then prices will 
come down with a run, in a state of violent and painful 
congestion, and the consequences it will require years 
to realize. 



iVay 7, 1S83. 



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